Tokenizing Bharat

Transcript

[music] [music] >> Thanks Rashmi for the introduction. And thanks Jaydeep for a wonderful grounding session to start this conversation. Uh it was a great overview of all the timeline events that have happened and I welcome the panel for this conversation as well. Uh my name is Rohit. I'm going to just take a minute to establish a frame for this conversation. As we all know, India probably has tele- trillions of assets in rupees that stays locked away in our jewelry, in our banks, in terms of invoices that are unpaid, in grains in warehouses that

we'll hear more from Sanmesh as well. And our buildings and our infrastructure, all these assets are hard to split. They're hard to move, they're hard to trade. And for the purpose of this conversation, we'll think of tokenization as a way to convert these assets into a shared digital ledger that's transparent and that gives us the ability to divide, to transfer, to move it fast. But at the same time, um we all know that speed cuts both ways. Whatever moves fast can create a damage fast as well. Systems that um could prevent a contagion because of a bad economic activity that

a regulator would have had an opportunity to stop will now spread very actively. So, there are two sides to this conversations and um what we want to do in today's conversation is discuss about how do we bring this tokenization without breaking what already is working. And um we're great to have uh the panel here that's representing the the regulations, the rules, the the rails, and the rollouts. So, that's what we'll focus our conversation on. So, my first question is to you, Mr. Pramod Rao.

You have seen this conversation across many sides of the table as a regulator, as a lawyer, and as as a startup founder as well. When when we we as builders think about innovation, and I have been guilty of this, often time the optics of the perception is that the regulator is the one who is saying no. And what I want to ask you is when a new instrument when a new economic instrument lands on the desk of a regulator, what are some of your approaches to evaluate a new instrument?

>> So, I think you know, maybe two or three things and including I wanted to like you said Jaydeep has given us a good grounding or framing. So, the one piece missing and I I diligently took photos so that there is no you know, later question. Is what he missed out and what he missed out is that there is a IFSC discussion paper on real world asset tokenization, which is what we will be talking about. And I think that pre-dates a lot of regulatory development and I call it work in progress. But equally that at GIFT City there are several several projects which are actually exploring tokenization, I think needs to be

acknowledged. So, now to come to your question, the way I would call say it is that startup world and probably as much as people focused on crypto and tokenization, the thing which has taken root is you know, build fast, break things and and usually that is the thing of saying that otherwise we might lose the momentum or what have you. And a phrase that I heard just last week was can instead things be built deliberately?

Can things instead be built in a manner that they create lasting institutions or instruments rather than those that can otherwise cause evaporation of confidence very soon or have risks which which are not even imagined playing up. So, to my mind, I think that is exactly where the regulators and regulatory systems want to strike a balance of saying foster innovation, but do it in a manner that I know it is as safe as it can be. Uh and sometimes I think some measure some in the audience may have heard me say this before, but I'll say it again.

Uh you are in a jungle if you are working in the arena without regulation, right? What regulation seek to do is create a playground. Uh and then people who come into the playground know that there is a rule, there is a referee, there is somebody who will call out if there is unfair play. Uh if you however choose not to be in the playground, then you live and die by the law of the jungle, right? Uh and to me, that is the sort of broader message that I will share that just think about it in terms of if you want to expand the market, why why do you think that regulators will curb you?

Uh regulators want to enable, regulators want to do it with guardrails, with the things which make that happen. So, yeah, to me that is what I would sort of say. >> Thanks for sharing that. And if I could double-click real quick, I don't think everyone here may or may not be aware of IFSC. You have been on the board member as well. Uh could you just give us what it is and what the goals are? >> Sure. So, uh in fact, I would call IFSC the International Financial Services Centres Authority as India's offshore onshore regulator.

Uh and what it is seeking to do is foster offshore finance center uh on the mainland of India itself. Uh and it's located in Gujarat. It's called the Gift City, uh the location where it is. And the IFSC combines actually the powers of Reserve Bank, the central bank, uh the securities market, the insurance regulation and pension regulation. So, in a way it's a unified regulator for that zone and has, like I said, floated a discussion paper, operates a sandbox that is quite active and a lot of a lot of things good things happening there. I also believe it's like a sandbox for the country because what works there and if if it is indeed

not necessarily grounded in foreign currency, it could actually be deployed in India, too. So, >> Yeah, great. Thanks for that context. I'll move to Sunmesh you next. I I remember reading the Fintranet white paper the first time and I read it four more times, not because it wasn't clear, but it was so novel. And for the folks here, could you take some time to highlight what Fintranet is, what the vision is? >> Um okay, first of all, thanks for having me and it's an honor being squeezed between two Promods whom I've had a lot of interactions with. And yeah, [clears throat] I got momentarily worried when you said you have read the paper four times. I was like, okay, it's going to be a tough

question coming in. Uh so, yeah, so I'll give the context about Fintranet. So, starting with who's building it, it's basically the same team who built Aadhaar, UPI account aggregator and then now are getting into Fintranet which is also into tokenization. So, when we were building stuff, we understood that uh there are a lot of silo systems. So, there are basically three problems. First is universality. Let's let me explain that.

Uh I can transfer money to you seamlessly because of UPI in India and maybe some friendly countries for now, but it's not as seamless when it's America to Singapore or Namibia. So, it's not that universal because everyone has their own rules. Uh second, it's not unified. By that what I mean is your stocks are in a different ledger altogether, money moves in a different ledger, your marks, marksheet, everything is in a different ledger. Everyone has their own set of rules. Some is private, some is public. So, it creates that friction. So, I can't I can transfer money seamlessly, but I have two sons. I can't give silver or gold digital gold as seamlessly as it can.

And third is it's not user-centric. By that, I mean if I want to go and check on my bank balance or take a if I want to go for a visa application, I have to take bank accounts I have to I have to go to the bank or I have to digitally go to the bank and get those things in spite of me having it. So, that's when we said, "Okay, is there any particular thing? There are more than 100 types of assets. If we try to solve everything, it'll take us hundreds of years. So, is there any technology which can help to transform it in some short scale of time, maybe 5 years or 10 years?" And that's when we thought that, "Okay, tokenization is one where you can standardize things. You can get different types of assets together and

then with the help of regulators and with their guidance, create an arena where it can be seamlessly done in a risk-free fashion. So, yeah, that's Finnet. >> Awesome, wonderful. And I'll come back with more examples of pilots back to you as well. Pramod, my question to you is I I read some of the work that you've put out there and you think of India as the world's tokenization factory. Could you rub some of that optimism on rest of us on on what goes behind that thinking? >> Absolutely. So, if you see India, like we are building tokenization we we we like we have UPI. We build anything at scale in a regulated environment. So, when it comes to tokenization and we are talking about regulations not being

clearer, but I'll give you examples where we are already tokenizing assets. You're not like if you're using a Uber to go from one place to another, you don't know the technologies which is being used. You don't need to know them. Yeah, but you just need to use them. I'll give you a couple of real-world examples where I have played a role, my organization has played a role. So, we are a 350-years-old organizations, 150 years in India. And we've seen the changes happen. We have been there and we are standing strong. So, one example I'll take from India, that's the Ministry of Power. So, I've been working with them since 1 year, 1.5 years, designing the policies, aligning them with the requirements, and you'll be happy to know that the carbon credits in

India is built on Ethereum chains on the Hyperledger Besu, and it will be tokenized in the next 2 months, it will be live for the entire country. That's a live use case at a scale using the same tokenized rails. If you just go global global, you are talking about payments. Payments is an issue when it comes to cross-border payments. So, in 2021 when Swift had launched their hackathon, we had participated in I was representing one of the bank. We were in top three of that hackathon, work with Swift like Nick Kerigan who is the chief innovation officer out there, work directly with him for the next 4 years as a part of steering committee, and right now you know the Swift ledgers are coming in. And how India can play a role. So, uh let's say you are

like using CBDC as the rail for cross-border payment, you use the Swift ledgers with ISO 20022 standards, and the other side can be stable coins if it is regulated in other DLT. Uh in another examples that are used on the tokenization side, if you see the biggest software which which is being used for collateral repo in the world presently which transacts lot of transactions like around 7.9 trillion dollars monthly is DLR they now call it DLX from Broadridge. It's completely designed developed from the Hyderabad office in Broadridge.

So, India is already building for the world. We are the GCC capital of the world, and in India also you'll see like in the financial sector, we already have UMI, unified market interface. You may see it as a small chapter, but it's actually building a DPI. This DPI will allow you to transact with all the different kinds of assets which will be tokenized. We are starting with certificate of deposit, it will go to stocks, it will go to bonds, and you like anything can be tokenized. But But that anything can be tokenized is one thing which like people who are there in the regulations, people who are there in finance, you don't want to hear because you need to know the left side of the story, the as is, and the right side, which is the innovation, and then you need to see where things actually

collide and they work together. >> Absolutely. Yeah, thanks for that context. And to piggyback on that theme, and Mr. Raw, my question is to you. Tokenization is a buzzword now, but India has been tokenizing in the form of REITs, the infrastructure investment units. So, small investors could own a parcel of a building or a highway. What are some of the experiences from a regulatory standpoint from that time that we should also know as we move towards more of this version of tokenization? >> So, the way I would put it is it's almost a 10-year plus regulatory framework for REITs and InvITs. And I think it is important to acknowledge

that there was a regulatory glide path that was adopted by the regulators. I think at first instance, it was more to say that we want to limit it and limit its access to investors who sort of understand this instrument, the risks which play along, and so on. And after that, after we also and such investors have validated it is when we will, you know, sort of allow it to become more and more popular. And that popularity comes from saying, "Okay, you can now buy a REIT for 100 rupees."

At a earlier date, it was probably 10 lakhs, then scaled down to 1 and 10,000, and finally you can actually buy it on the exchange at whatever is the market value. Now, on the InvIT side, it continues to have two characteristics. One which is private, where indeed the expectation is that the lot sizes will be 10 lakhs or more and a public InvIT where it gets more easily traded. But the lesson I'm trying to draw out for the folks is that you begin with where sophisticated people when they're entering a particular set of market, you allow them to have the first bite so as to speak of that risk and they are sophisticated or wealthy

enough or whatever to be able to afford a loss. But if you want to take it and make it more democratic in terms of access, it should have been tried and tested, reviewed and I think that's what the regulatory system's trying to do. So I I was first hand within SEBI when both the REITs and InvITs took root, but also when we looked at fractional real estate platforms and said can we bring them into the market as small and medium REITs. So that's uh There were similarly online bond platforms and when we surveyed across the world, what we realized is bonds aren't actually sold to retail. They're far more institutional product and stay in institutional hand. So could we

actually democratize access to these bonds and online bond platform regime came in and now there are more than 30-35 of such platforms. Uh All of these are examples of saying that the regulator's willing to expand the regulatory perimeter, create that playground even if there was none, but it requires both sides to tango, right? It can't be that the startups or the people outside the playground continue to believe that things have to be exactly as they want it.

And I have an example to take of it, which is around digital gold. Uh gold in India is very popular and I think digital gold at whatever level allowed the fractional sales at if you want 1 g or 100 rupees or what have you, right? >> [snorts] >> Uh the regulator did create a response. It came up with a concept called electronic gold receipts. It held multiple consultations and then finally promulgated it into a regulation. Uh some of the players who didn't see exactly their business model being replicated in the regulation chose to stay outside of it, right?

Uh and this is what I call a fatal flaw that you're not willing to tango, you're not willing to enter that playground and then from inside help shape what it should be. You want to sit outside, you want to keep calling out and and at some level I'm saying there is there is something to be said for those who have created newer systems. Uh on the regulatory side, I think they should continue to have a listening uh ear. Uh to my mind that EGRs through their launch up till date have just done about 100 200 crores in total cumulative sales tells me that that policy has not worked right?

Uh digital gold in the same time span on a monthly basis is now averaging at least 2,000 3,000 crores of sales. So clearly there is something which worked, something which did not work. But like I said, it takes two to tango and I would I would genuinely hope the entrepreneurs in that space and the regulators come together to sort of see what is it that is the bridge and maybe that might be the very first real world asset that can easily get tokenized and distributed as well. So if you can have digital gold or digital token of that gold is equally within my mind within reach.

>> Great. I'm going to piggyback on the two to tango theme and my next question is to you, Sanmesh. There is a gift city sandbox, but at the same time a lot of the infrastructure is coming up. NPCI has a DLT called Runex. There is the unified money interface. There is Finternet and you're experimenting with other chains as part of your pilot as well. I wish we could have had a whiteboard here, but if you were to tie this infrastructure together in how this interplays with each other from an India standpoint, what should we know about it?

>> Okay, that's a great question. So uh the best analogy I can give is uh we are like a super highway of sorts and you will have different kind of private chains, public chains, and stuff. We are essentially neutral to it. Now, let me expand this analog uh into a a real-life example. Um if I am [clears throat] tokenizing a warehouse receipt, out of which a farmer can get loan from multiple banks. Now, banks may not necessarily want a public chain. They would want their own maybe chain or something which is uh the RBI chain.

Uh they might be comfortable with that, but the same token can also be released in DeFi pools where through SPV uh on Ethereum, Solana, anyone can put their money and then from the SPV it can be rolled out as a loan in in friendly countries where it is possible. So, the same token can flow into different different categories and Finternet is the one who will just lay down the rules and say, "Okay, to conform to the public chains, you have to have this kind of token standards. For this, you have to have this kind and this kind of token standards." And what we are also essentially trying to do is uh do four or five pilots together. My personal hypothesis is that out of that, one out of five will stick.

Four out of five will maybe not run its course or may just flop as well. >> Got it. All right. Uh the the token flow that you mentioned of navigating from public to private, it sounded like music. Um hope we'll get there soon. But sorry, you had a >> No, no, no. Uh my main thing was that uh what I've also realized in the last 2 years of working here is theoretically everything looks good. When you hit the ground, you get to know that it's really different than what is being told on stage. >> Absolutely.

Um on that theoretical um analogy, one of the position promote you have advocated is a separation of regulated tokens versus um everything that's in the wild wild west. Could you double click on that and why that's important? What would that unlock? >> Yeah. When you're talking about regulated assets being tokenized because tokenization is a big umbrella new keyword which is there in the market. And you'll hear people talking about tokenizing land. But what do you mean by tokenizing land? Who owns the ownership? Where is the legal ownership? Where is the economic ownership of it? So there are different rails which is already there. We are talking about just creating a digital twin, the tokens. And we don't talk about what if.

And and that's where the the analogy lies. Like who owns the token? Who controls them? Who governs them? What if things go wrong? We are talking about a technology which is running in between. Left side we have AI, right side we have quantum. You never know the next day your cryptographic protocols are at risk. The smart contract which you have written can be frauded. Your private keys are not safe. So you're trying to build and we are trying we are not even trying. We are already in a ecosystem which is digital. We do have digital identity. We have UPIs you like we have solved it at scale. Why not use the same infrastructure? Bring in this technology where it actually makes sense and then build the rails. And that's where the left side when we are talking about

regulated assets. You have bonds. So what is the problem which we are trying to solve with bonds? So presently like let's say even for stocks. If I am a Gen Z and I'm a straight in stocks. And let's say I don't want to use any name but I sold one stock for around 20 lakh rupees. The next second I'll want to buy another stocks for that 20 lakh rupees because there is a reason for it. But when I get a T plus two at least we millennials are we have patience. But Gen Z don't have patience. They will not wait for like two days for their money to come back. They will they will sue the as they the SEBI's of of the world. And that's where we are trying to solve a problem where the legal rights lies with SEBI.

You're it's a digital tool twin where the token is just representing the economic right of the token. And then you're moving it ahead. But when you're coming in left side when you when you know that the token is actually representing both the legal and economic right. So, those tokens like come with their own risk. They come with their own governance protocols, and that's where getting them into the regulated environment is challenging. And we will we have already covered a long round in the last 10 years, and we'll certainly evaluate it step by step. Because India, you know, we we have so much diversity in India. If one move goes wrong, it will actually impact the last mile of the person who is there in the country.

>> Absolutely. And on the topic of regulated bonds, the SEBI's pilot that has helped tokenize more than 1,000 crore of bonds. It's in pilot. Let's say a year from now, things are operating well. What are the signals a regulator looks at before deciding, "Hey, this is working well. Let's move on to the next asset, or let's open up the access." What would be the regulatory lens to be able to take that call? >> So, I think two or three things, and part of it when I was listening to Pramod, I wanted to also add, and it dovetails nicely with the question you've asked.

So, when you tokenize anything which is regulated, I think the regulator is first looking for that this new form should not in any way take away things that I substantively wanted for the original, right? So, if the bond is should have a face value, or be able to be sold only at a 1 lakh rupee. You know, tokenization can make it, you know, one unit of that 1 lakh. It's not about the technology being in question. For the regulator, it would be, "Can you make sure that that token is indeed 1 lakh?

Right?" Yes, there are other instruments where they permit 10,000. The same bonds, if they are fulfilling certain norms, can be sold at 10,000 face value. It's gone down to 1,000. So, it's not that they are opposed to fractionalization. It's with certain bells and whistles. So, can you make sure that as you tokenize, it follows that? So, I think one would be that lens. The second, and I mentioned this earlier, but I'll say it again. And I heard it from somebody else, so I can't take credit for it, which is that move fast and break things versus be built deliberately and build really things which last, right?

So, if I had to juxtapose that here, the way I would put it is for those who are building around what let's say in bonds, what is it you're trading off versus what you're trading up for? Uh, today bonds, just like equity, follows a settlement cycle. In India, we've moved to T plus one. There was even a proposal of T plus zero. So, in some senses, we are ahead of most of the other markets in the world. What does tokenization do? It actually allows what I call instant settlement, right? The atomic settlement as we speak of is that it is delivery versus payment.

Uh, what does delivery versus payment do to our existing institutions? I think if I'm in the regulator's shoes, I'll be worrying about that. Uh, am I disrupting our clearing system? Am I disrupting how today trade is being done? Today, a lot of things we for instance, when we adopt netting, uh, netting is adopted because you have gross trades which have occurred between multiple counterparties, and then finally the exchange is the place where you have decided where the netting is to take place. The minute you go to only using tokens in a delivery versus payment scenario, you really have a gross settlement. Now, it's not net anymore. Is the risk to the

system increasing because now it's on gross basis? Uh, so each of these will become the lens with which the regulator will look. Uh, today, when we hold stocks or bonds, we hold them, and in India, 99% is held in demat form. Not only is it demat form, it is held by the original beneficiary. Uh, unlike the United States, where you know there are street names, and it's only your broker who knows who's the owner of the stock. In India, we can trace the ownership right down to that individual.

Uh will a wallet which holds the token address or whatever be capable of replicating this confidence that the regulator has with the demat accounts? Uh in the demat account system, there is a centralized party. Uh whereas when we talk about tokens, it's always in the DeFi context. So, at some level, where will this, you know, sort of guardrails for this be? So, it's not a easy debate uh because for most people, like I said, it's move fast and break things. Uh but it comes down to that how do you address what the market has now both survived, nurtured, grown, and in indeed in India, we adopted it in '96. We are in 2026. Markets only grown grown by

leaps and bounds and not been impacted that it's two institutions which centrally provide this depository service and are able to do things. So, these are what I would sort of talk about as the lens which a regulator would have. And it's not that I'm privy to what they have. Uh I have stepped away for a little while, but if I to hypothesize, I would put these. >> Sounds great. Thanks for that overview. And I think it becomes more important what are you solving for? And to that point, Sunmesh, um I've spent more than a fair share of time at a sub-registrar office trying to deal with paperwork.

When you did a pilot, you chose grains and warehousing. Uh why was that? And and could you tell us more about the pilot? >> Okay. Thanks. I'm really [clears throat] excited to talk about this one. Um So uh before talking about the pilot, I would also like to uh credit Pramod for actually advising me and telling me about some of the things which India needs in terms of pilots. So, there's a distinction that, okay, some pilots looks very cool. Some pilots actually will help the nation transform.

Uh and I also go by a two-by-two logic, which is if an XY axis is there, you have impact and you have hurdle. Uh Try to get in projects which are high impact and low hurdle. High impact, high hurdle, I'm 36, I'll take 60 to do it. So, do projects which can be done within a matter of 2-3 years. And within the 2030 use cases which we were exploring, um warehouse financing came into like that bucket which was high impact, low hurdle. And perhaps the only one or two use cases which were there. And then I went, I hit the field, I went to rural Sangli, Nanded, then your nearby near Lonavala

as well as Panvel, there are a lot of warehouses. Then I understood the landscape of warehouses. There are regulated ones. The regulated warehouse in India is only 10%. 90% are unregulated. So, it's very different than banking industry. Second, there are three archetypes of warehouses. You have the regulated ones which have banking lines up to a limited level. You have unregulated ones which are sometimes just a warehouse with no financing options. And third, you have corporate warehouses where you do capital financing. And all the three archetypes have different set of problems. And farmer being like 40% of India's population and so less in terms of financial liquidity,

we thought this can be a great thing because our main objective of the pilot is that the farmer should meet the warehouse. The warehouse should get incentives to give liquidity from the bank to the farmer. And the bank should get so much amount of data points that they can confidently reject or confidently approve the loan. We are not looking at, "Okay, you have to approve it." But is the information asymmetry going out? So, within that token, you only don't have the verifiable credentials of the farmer, but you have details such as um the farmer's information, the grains, the independent sampler's assessment, the dynamic rating, what is the

warehouse vintage along with whether it's insured or not for rodent and everything. So, it's more than 200 data fields going into the loan origination system of a bank. So, imagine personal loan is a derivative of your CIBIL score. Can we make a warehouse loan as a derivative of that token? That's the major thing which we are solving. It's an 18-month project. We are in our design phase right now. Uh so, perhaps in a matter of 6 to 9 months, we will be in a state where we can actually have a research paper about what went right, what went wrong. And we have advisors such as Promoth to guide us and this Promoth to help us on the ground rollouts. So, really nice.

>> Awesome. We would look forward to that. On the topic of pilots, Promoth, you've seen this across industries. What are some of the {quote} and {quote} red flags early in the life cycle of a pilot that you see that you know, okay, this is not going to have an impact versus this pilot is really going to have an impact. Could if you could double click on that? >> All right. So, like being in the blockchain space since more than 12 years now, working only with the institutions, I can say the one mistake which we tend to do, specifically when it comes to blockchain tokenization, because we are so emotionally attached with the technology, we try to place the technology as a solution.

And that's where we go wrong. You if you're trying to like, you know, AI is on a hype cycle, blockchain was on a hype cycle, and you have seen more failed project than the successful projects. So, my suggestion would be start with a problem. A problem which you think or maybe then validate that problem in the peer group. Get into the as is, how the existing system has been surviving with that problem, whether your problem is aligned with the as is process or the processes which actually exist. And if you think and if you think that it works, go for a POC. A POC using AI doesn't take more than 2 days to build. In our times, we like when I started in blockchain, my first POC was for the additional chief secretary in West Bengal government. I

like had to design everything on hand, develop everything. But right now there is a birth certificate in Newtown Kolkata Development Authority, which is licensed January 2019. So, it's been 7 years it's already live. But the reason why it became successful was because we started with a problem. We aligned it with the processes. We fitted a POC and we saw it's working. Have a discussion with the stakeholders and then work with them. I'll just say and end my like my answer where we started with Vitalik in the on the same stage. He said that the problem is not technology. The problem is people, the ecosystem. And that's not a problem. You need to align that with the people, with the ecosystem and then place technology rather than the other way around.

>> Makes sense. Sounds great. I'm going to do a quick time check. Uh do we have time for one more question? All right. We'll do a quick lightning round. Um let's assume a hypothetical world where the regulations are in place, the safeguards and controls are in place, the technology works in a predictable manner. Um Pramod, I'll start with you. What would you like to see tokenized in Indian context if you had to pick one asset? >> My personal would be stocks. Yeah.

>> Awesome. Great. So, secure securitize the stock and make it more accessible. Um awesome. Uh Sandmesh? >> Um anything to do with MSME and farmers. Uh so, as you know the India one, India two, India three construct. Uh I want assets within India three and India two to really get monetized and get liquidity. >> Wonderful. I think the last number I heard was 25 lakh crores of the credit which is in the unstructured industry that has potential to unlock that that capture.

Um thank you. Uh Mr. Rao? >> I would actually concur. I think both MSME and the trade receivables, if we can actually figure out a way of tokenizing them or being able to get better you know people who can buy those and give that benefit to the MSMEs. I think that will be a dramatic shift. At some level at Winter net we started talking about deep tier supply chain finance. So if that really takes root because I continue to believe that the creamy layer actually manages to get the credit and whatever facilities but the deep tier the minute you are minus three minus four from the key supply chain partners.

I think they struggle a lot and at some level if we can find a way of solving that it will really be a boost. >> Awesome wonderful. Thanks for all your inputs. I think we started the morning with Denver saying the barrier to build is reducing and so what to build becomes more and more important. So hopefully this conversation across the rules the rails >> [music]